The car in front is still a Toyota

Toyota’s troubles land it in front of a congressional hearing, but analysts remain upbeat on the carmaker’s long-term health.

It seems like Toyota's image problems could hardly be worse if its cars exploded on ignition. The world's biggest carmaker is facing a barrage of criticism in the US after belatedly admitting that millions of its cars have the potential to suddenly accelerate out of control.

The first recalls started way back in October, but the company has still not identified what causes the problem, after initially blaming the runaway cars on faulty floor mats and sticky pedals. Despite persistent speculation, Toyota insists that the sudden acceleration is not caused by a glitch in its electronic throttle and continues to focus on mechanical solutions.

In the meantime, more than 50 deaths in the US have been unofficially attributed to the mysterious defect, according to road safety regulators there, including a family whose final moments were heard on a 911 call as their loaner Lexus sped at 120mph down a freeway in California.

Toyota hasn't helped itself through the crisis. The firm's guarded approach to communicating its actions has antagonised American media and turned a bad situation into a full-blown PR disaster, which now looks sure to spawn endless regulatory and criminal investigations, not to mention a congressional hearing that took place in Washington in late February.

Akio Toyoda's appearance before that hearing hardly helped to improve matters either. "This week's hearings have raised as many questions as they have answered," said Bart Gordon, a Democratic congressman from Tennessee, after the two-day session, during which the Toyota president insisted that the company had not been deliberately slow in its response.

"My name is on every car," said Toyoda. "You have my personal commitment that Toyota will work vigorously and unceasingly to restore the trust of our customers."

On the face of it, that seems like a big ask, but financial analysts are confident that Toyota can shrug off its problems and get back to world domination in a snap. The company has forecast that the accelerator and brake defects will cost it $2 billion in this financial year, which ends in March, and analysts reckon that it could still sell almost two million cars in 2010, which would be close to its 2009 market share.

Some analysts, such as Tatsuo Yoshida at UBS in Tokyo, have even upgraded Toyota's profit forecasts for the coming financial year, based on its improved profitability during 2009 and confidence that it can easily buy back market share by offering bigger sales incentives. For an extra $1,000 a car, it should be able to tempt potential customers back from rival dealerships, say analysts. And it might just be that easy.

"As long as Toyota does not make any mistakes in terms of its response to customers, the media, regulatory officials, or Congress, we think lingering long-term adverse effects on the company's reputation, sales or earnings after the media storm has passed are very unlikely," said Yoshida in a report dated early February.

Not all analysts are so confident, but the consensus is reasonably close to Yoshida's upbeat optimism, and for good reason. Toyota might be considered a foreign manufacturer by news anchors and some politicians, but in America where it employs tens of thousands of people, it has as much power as any of the big US carmakers -- and just as many tax breaks and concessions too.

In total, Toyota employs 33,000 people in the US and claims to provide indirect employment to 164,000 more, mostly dealers and suppliers. It says it has invested $18.3 billion in its US operations, which includes a manufacturing and assembly headquarters in Kentucky and assembly plants in Alabama, Indiana, Texas and West Virginia, with a new plant slated for construction in Mississippi -- all of which are "right to work" states that are non-unionised.

Given the economic environment, lawmakers from these states are not likely to stand idle while Toyota is assaulted by politicians representing its rivals. Note that Bart Gordon, quoted above, hails from Tennessee, home to the North American headquarters of Nissan, which now has problems of its own.

In early March, Nissan recalled more than half a million pick-up trucks, SUVs and minivans that it says have brakes that can become "disengaged". They also have faulty fuel gauges. Nissan blames both problems on suppliers in the US and Canada, and says that only three cases have been reported by customers.

"The important thing is that there have been no accidents relating to this at all and no injuries," said a spokeswoman for Nissan.

While Toyota and Nissan scramble to maintain their reputations, rival Japanese carmakers are looking to take advantage. In January, Suzuki cemented a deal with Volkswagen that has the potential to create the world's biggest automaker, a crown that Toyota has worn for just a year.

VW is paying $2.5 billion for a 19.9% stake in Suzuki as part of a cross-shareholding deal that will give the German company access to Suzuki's small-car knowhow and its strong market position in India, through its 54% stake in Maruti Suzuki, while Suzuki hopes to benefit from VW's hybrid and low-emission engines. Together, they make more cars than any other auto company or alliance.

Tie-ups in the auto industry are notoriously troublesome, but VW and Suzuki have a good thing going -- on paper, at least. Small cars, emerging markets and low-emissions represent a holy trinity for carmakers today, so the alliance seems to make sense. Only time will tell.

Just a few days before the VW-Suzuki announcement, Mitsubishi and PSA Peugeot Citroen announced they were taking their relationship to the next level and exploring a capital tie-up, though they have since backtracked.

The deal would have provided Mitsubishi with a financial lifeline and given PSA access to the Japanese manufacturer's electric vehicle technology, but Philippe Varin, PSA's chief executive, has since ruled out the $3.4 billion deal, which would have seen PSA buy a 30% to 50% stake in Mitsubishi.

"For the PSA group there were conditions to fulfil for any development outside the group: that it creates value for shareholders and that it is not inconsistent with the [group's] return to better financial health," he told reporters at the Geneva motor show.

But Toyota is still the company to beat, despite its current troubles. As one M&A banker in Tokyo told FinanceAsia recently: "There's a lot of noise out there right now and that's certainly damaging to its reputation in the near term, but make no mistake, the car in front is still a Toyota -- and not just because it's accelerator is broken."

This article was first published in the March 2010 issue of FinanceAsia magazine.

¬ Haymarket Media Limited. All rights reserved.

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